anglo interim report 2011

8/13/2019 Anglo Interim Report 2011

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Interim ReportSix months ended 30 June 2011


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Caring for the environmentAt Anglo Irish Bank, we take a responsible approach to environmental issues and have worked with our print partner to minimise theenvironmental impact of our Interim Report publication.

The paper selected for this report comes from certied well managed forests, accredited by the PEFC to a standard known as Chainof Custody. These certied forests are managed to ensure long term timber supplies while protecting the environment and the lives ofthe forest dependent people. The Interim Report is a CarbonNeutral publication. This was achieved by selecting a print partner who isalready a CarbonNeutral company and by offsetting the unavoidable emissions associated with the production of this Interim Report.

Anglo Irish Bank is pleased to be able to add both the CarbonNeutral and the PEFC logos as evidence of achieving these standards.


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Contents

Forward looking statements & Contacts 2

Economic backdrop 3

Chairmans statement 4

Group Chief Executives review 6

Business review 8

Principal risks and uncertainties 16

Statement of Directors responsibilities 21

Consolidated income statement 22

Consolidated statement of comprehensive income 23

Consolidated statement of financial position 24

Consolidated statement of changes in equity 25

Consolidated statement of cash flows 28

Notes to the interim financial statements 30

Independent review report 80

1

ANGLO IRISH BANK Interim Report 2011


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Forward looking statementsThis report contains certain forward looking statements with respect to the financial condition, results of operations and businesses ofAnglo Irish Bank Corporation Limited. These statements involve risk and uncertainty because they relate to events and depend uponcircumstances that will occur in the future. There are a number of factors which could cause actual results or developments to differmaterially from those expressed or implied by these forward looking statements. The statements are based on current expected marketand economic conditions, the existing regulatory environment and interpretations of IFRS applicable to past, current and future periods.Nothing in this report should be construed as a profit forecast.

Contacts

For further information, please contact:

Ireland: Billy Murphy / Martha Kavanagh

Drury CommunicationsTel: +353 1 260 5000

United Kingdom: Jeremy Carey / John WestTavistock CommunicationsTel: +44 207 920 3150

United States: Billy Murphy / Martha KavanaghDrury CommunicationsTel: +353 1 260 5000

This document constitutes the interim management report required by Regulation 6 of the Transparency (Directive 2004/109/EC)Regulations 2007. It can also be found on the Group's website: www.angloirishbank.com.

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Economic backdrop

Property markets Sovereign yieldsProperty prices in developed markets are significantly belowtheir 2006/07 peaks (indices rebased to 100). Commercialproperty prices in Ireland continued to fall while the US andUK show some signs of stability above the lows of mid2009.

The spread of Irish Government bonds over their Germanequivalents continued to rise in 2011 as worries over theIrish economy intensified. Investors continue to seek safetyin German Bunds.

Employment in construction Stock marketsThe numbers employed in construction continued to fall in2011 as the industry continues to contract.

After a positive start to the second half of 2010 the ISEQunderperformed versus the FTSE Euro 300 during 2011. TheISEQ has posted a marginal gain for the previous 12 months(indices rebased to 1000).

Trade surplus Currency marketsThe Irish seasonally adjusted monthly trade surplus has been

volatile throughout 2011. A sharp increase in May 2011,reversing a fall in April 2011, was due to a significant fall inimports with exports remaining static.

The euro has strengthened significantly against the dollar

over the last 12 months, gaining 18.5%. Over the sameperiod the euro has gained 10% against sterling.

Yield

2.002.803.604.405.206.006.807.608.409.20

Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11

Ireland Vs Germany 10 yr

Index

900

1,000

1,100

1,200

1,300

Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11

ISEQ FTSE E300

Irish trade surplus

1,200

1,800

2,400

3,000

3,600

4,200

Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10

Irish trade surplus m

Currency

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11EUR/USD EUR/GBP

Property price index

50

70

90

110

130

150

170


Ir eland IP D All P roperty UK IPD All PropertyUS IPD All Property

Construction employment

100

130

160

190

220

250

280


Employment in Construction '000

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Chairmans statement

Overview

The first half of 2011 has been an eventful period for the Bank.Following intensive interaction by the Banks managementwith the Authorities during 2010 in identifying and analysingthe best course of action for the Bank, a number of significantactions were taken as part of the ongoing restructuringprocess. Significant progress was made in deleveraging theBank and in controlling and containing risk.

These achievements reflect the commitment of the Board andsenior management of the Bank to continue to operate to themandate given by the Banks Shareholder which is to run theBank in the public interest and in a manner that minimises thecost to the taxpayer.

Despite recording a year to date operating profit beforedisposals and provisions of 332m the Bank reports a lossbefore taxation for the six months to 30 June 2011 of 101m.Total assets at 30 June 2011 amounted to 54.1bn,representing a decline in the period of 16.7bn or 24% (on a

constant currency basis). This reduction constitutes significantprogress in deleveraging and in containing risk.

Action by the Bank ensured that, despite a difficult operatingenvironment, it did not require any additional capital injectionsduring the period. Total capital support provided by theShareholder remains at 29.3bn, resulting in a Total Capitalratio at 30 June 2011 of 13.7% and a Core Tier 1 ratio of12.1%.

Further details in respect of the Banks results for the periodare provided in the Group Chief Executives review and in theBusiness review.

RestructuringTwo years after nationalisation, the European Commissionsapproval of a restructuring plan for Anglo Irish Bank and IrishNationwide Building Society (the Restructuring Plan), pavedthe way for a combined entity which will focus on the orderlywork out of its loan book over time. The integration of the twoentities will require us to bring about further changes in orderto put in place an organisation capable of delivering on ourbusiness and stakeholder work-out objectives.

As part of the reorganisation and restructuring of thecombined entity, the Bank will change its name to Irish BankResolution Corporation Limited (IBRC) in the coming months.This development will underline the Banks focus on thechallenges ahead.

The new organisational structure will be bedded in as rapidlyas possible over the coming months. A reduction in headcountnumbers will be an inevitable part of this process. As Chair ofthe Board and a public interest appointee, I thank andcommend the staff and management of the Bank for theirdiligence and commitment to the public interest in extremelydifficult and demanding circumstances. They have respondedin an exemplary fashion to the exacting demands of the Board.

Legacy matters, disclosures andexceptional expenses

The Bank continues to co-operate fully with ongoinginvestigations by the various Authorities. It will continue todisclose its activities and financial position in a fully transparentmanner and as required by legislation and market regulationand in the public interest.

While staff costs have fallen by 16% in the 6 months to30 June 2011 compared with the period to 30 June 2010,other administrative costs have increased by 50% as a result ofsignificantly higher professional fees related to loan book assetquality, litigation and other ongoing reviews. The Bank isengaged in a number of ongoing legal proceedings, each ofwhich is being vigorously defended, albeit at the risk ofconsiderable cost to the Bank and therefore to the Irishtaxpayer.

Exceptional costs of 29m were incurred in the period andprimarily relate to professional fees associated with the Banks

restructuring, the NAMA process and the ongoinginvestigations into legacy matters. A proportion of these costsarise from the Authorities requirement for external validationof measures proposed by the Bank.

Future of the combined entity

We will now continue with the task of working out the Banksoperations over time in accordance with directions given to theBank consistent with the Restructuring Plan, notably with:

The sale of the Banks US loan book; this process isalready underway and is expected to complete inthe coming months;

The orderly management and wind-down of theBanks UK commercial loan book over the next fiveyears with the sale of any residual part of that loanbook thereafter;

The orderly management and wind down of theBanks Irish commercial loan book over a period ofup to ten years (or earlier, depending on prevailingmarket conditions);

An orderly management of the Banks Irishresidential loan book with a view to a sale of theremaining loans within five years;

The disposal of the Banks Wealth Managementdivision (the evaluation of various alternativeproposals is ongoing in relation to this project); and

Full resolution of the Bank by 2020.

The Board will work closely with the management and staff ofthe Bank to pursue these various initiatives throughout thefuture phases of the Banks resolution.

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Chairmans statement continued

Conclusion

Whilst the Bank has made considerable progress in a difficulteconomic environment over the last three years, theunprecedented market turmoil, market liquidity and currencyissues that currently face eurozone countries present achallenging background to the Bank as it pursues the nextphase of its restructuring.

On behalf of the Board, I would like to thank the managementand staff of the Bank for their continued dedication and focuson continuing to implement significant change in theorganisation over the last six months. In addition, I would liketo thank the Minister for Finance and the staff of theDepartment of Finance, the Central Bank of Ireland and theNational Treasury Management Agency for workingcollaboratively with the Bank during this period.

Alan Dukes

Chairman25 August 2011

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Group Chief Executives review

Throughout the first six months of 2011, my continuedobjective, and that of the new management team, has been torun the Bank in the public interest and in a manner thatultimately minimises the cost to the taxpayer. During thisperiod the Bank has continued to make considerable progresson restructuring developments. This progress has followed our

focus in 2010 on stabilising and de-risking the Bank togetherwith developing an appropriate restructuring plan. Keydevelopments during this financial period include:

European Commission (EC) approval of the Banksrestructuring plan

On 31 January 2011, a joint restructuring and work-out planfor the Bank and Irish Nationwide Building Society (INBS) wassubmitted to the EC. This restructuring plan provided for theamalgamation of the Bank and INBS following the transfer ofthe majority of their deposit books and their senior NAMAbonds to other financial institutions. Those transfers took placeon 24 February 2011 and, on 29 June 2011, the EC, under EUState Aid rules, approved the restructuring plan and clearedthe way for the planned amalgamation to proceed. Therestructuring plan envisages the work-out of the combinedentity over a period of up to 10 years and the Bank is gratefulfor the full support and commitment of the Government to thiseffort.

Transfer of the Banks deposits to Allied Irish Banks,p.l.c. and AIB Group (UK) p.l.c.

Following a Direction Order made by the High Court on8 February 2011 under the Credit Institutions (Stabilisation) Act2010 (CISA) and pursuant to a Transfer Order made by theHigh Court under CISA on 24 February 2011, the Banktransferred the vast majority of its Irish and UK customerdeposits to Allied Irish Banks, p.l.c. (AIB) and AIB Group (UK)p.l.c. (AIB UK), together with its senior NAMA bonds and its

Isle of Man subsidiary. This reduced the Banks balance sheetby approximately 11bn. Over 200 staff transferred to AIB andAIB UK as part of this process and I would like to thank themfor their commitment and hard work through what was, attimes, an extremely uncertain period.

Disposal of the Banks Wealth Management business

Also contained in the above mentioned Direction Order was arequirement for the Bank to formulate a detailed plan for thedisposal of its Wealth Management business; the Bankcomplied with this requirement and submitted the detailedplan to the National Treasury Management Agency (NTMA).In compliance with requirements issued by the Minister forFinance under Section 50 of CISA on 7 April 2011 (theMinisterial Requirements) the Bank has since commenced aprocess of examining the potential sale of the business and anumber of non-binding indicative proposals from potentialpurchasers have been received. A number of these prospectivepurchasers have been invited to further progress theirassessment of the business and a subsequent phase of duediligence has commenced. No final decision has however beentaken yet by the Board to dispose of the business andevaluation of the various alternatives is ongoing.

Closure of the Banks European branches

Pursuant to the Direction Order and the MinisterialRequirements, the Banks branches in Austria and Jersey wereclosed in June 2011. Furthermore, the Banks branch inGermany is in the process of being formally closed.

Accelerated sale of the Banks US loan portfolio

In line with directions consistent with the Banks restructuringplan, and a progressive and material improvement on the USmarket for real estate investment, a sales process for theBanks US loan book was launched on 22 June 2011. With

analysis and preparation completed, advisors have beenappointed and the sales process is now underway. This isexpected to complete in the coming months.

All of these developments represent significant steps forwardin the restructuring of the organisation and have beenachieved through the considerable focus and effort of theBanks management and staff operating with the full supportof the Board.

Financial Performance

The Banks results continue to reflect the challenging economicenvironment.

Economic backdrop

The overall specific impairment charge on the Banks loanportfolios of 0.9bn has reduced significantly in the period to30 June 2011 versus the same period in 2010 due to thereduction in gross loan balances primarily as a result of thoseassets transferred to NAMA in 2010. The asset quality of theBanks loan books across all sectors and locations continues tobe adversely affected by the continuing difficult economic andmarket conditions.

Ireland continues to be the worst affected market, accountingfor 82% of the overall specific impairment charge reflectingthe difficult economic environment, further declines inproperty values, lack of liquidity and high levels ofunemployment. In Ireland, the deterioration showed no signsof easing in the period with domestic demand remainingweak, investment and Government expenditure declining andhousehold expenditure static. These factors are furthercompounded by the increase in market interest rates duringthe period.

Operating conditions in the investment assets sector,particularly the office and retail sectors, continue to remainchallenging, brought about by a significant reduction inconsumer spending, high levels of unemployment in Irelandand investor uncertainty regarding the Governments plans toend upward only rent reviews in existing leases.

The development property market in Ireland remained severely

dislocated in the period with land values declining back toagricultural values in many cases. There also remains asignificant overhang in both the commercial and residentialmarkets as lenders seek to deleverage and de-risk their loanportfolios.

Notwithstanding these difficulties, the Bank did not require anyadditional capital injections during the period. As at30 June 2011 the Group reported total capital supportprovided by the Shareholder at 29.3bn, resulting in a CoreTier 1 ratio of 12.1% and a Total Capital ratio of 13.7%. Thelevel of surplus regulatory capital above the minimum required8% Total Capital ratio at 30 June 2011 is 1.8bn. Furtherlosses and/or increased capital requirements will impact on thislevel of surplus capital.

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Group Chief Executives review continued

Financial results

Despite recording a year to date operating profit beforedisposals and provisions of 332m the Bank reports a lossbefore taxation for the six months of 101m.

The operating profit of 332m and a favourable adjustment of601m to the cumulative loss on transfer of assets to NAMAare more than offset by impairment charges of 778m and theloss of 214m on transfer of the majority of the Banks Irishand UK deposits, the Banks senior NAMA bonds and its Isle ofMan subsidiary to AIB and AIB UK. Interest income on theGovernments promissory note is a key contributor tooperating profit.

Total assets at 30 June 2011 amounted to 54.1bnrepresenting a decline in the period of 16.7bn or 24% (on aconstant currency basis). The principal items driving thisreduction were the transfer of customer deposits and NAMAsenior bonds to AIB and AIB UK, the ongoing deleveraging ofthe loan portfolio and the receipt from the Shareholder of thefirst payment due on the promissory note. The promissory noterepresented 44% of the Banks total assets as at 30 June 2011.

The transfer of the majority of the Banks Irish and UK depositsto AIB and AIB UK in February 2011 increased the Banksreliance on Government and monetary authority supportmechanisms for funding. Funding from central banksamounted to 40.8bn at 30 June 2011 (31 December 2010:45.0bn), with 38.4bn borrowed under special fundingfacilities (31 December 2010: 28.1bn). The Banks creditratings were downgraded to sub-investment grade in late2010 by Standard & Poors and Moodys and by Fitch inFebruary 2011.

Asset management and recoveries

The Banks primary focus remains the orderly work out of theloan book while minimising losses to the taxpayer andmaximising returns on its portfolio. As the Bank continues todeleverage its lending portfolio, total gross customer loanbalances have declined in the period by 2.7bn or 8% on aconstant currency basis and at 30 June 2011 were 32.8bn.

The reduction in the loan book has been primarily driven byrepayments in the US (1.1bn) and UK (1.0bn) where therehave been signs of improvement and stabilisation in somesections of the market. This is in addition to the improvementin the availability of liquidity and refinancing options in thosemarkets. Deleveraging of the Irish portfolio remains morechallenging due to the continuing stressed economicenvironment and lack of liquidity, however there has beensome success primarily in the business banking and personalsectors with overall loan balance reductions of 0.6bn.

The asset quality of the Banks loan book across all sectors andlocations continues to be adversely affected by the weakeconomic environment and challenging market conditions. Thecontinuing deterioration of the Irish economy has seen anincrease in the proportion of the overall loan book that iseither impaired, past due but not impaired or lower quality andis therefore deemed at risk by management.

The Bank continues to pro-actively work with distressedcustomers, with the aim of maximising recovery for the Bankand, where appropriate, restructuring such loans so as tostrengthen and improve asset quality.

Costs

Staff costs have fallen by 16% in the 6 months to30 June 2011 compared with the period to 30 June 2010. Staffcosts have declined due to a reduction in the average numberof employees which was 17% lower in the six months to

30 June 2011 compared with the same period last year. Thereduction is primarily due to 210 staff being transferred to AIBand AIB UK as part of the Transfer Order of 24 February 2011.The Group headcount at 30 June 2011 is 1,075, a reduction of221 since 31 December 2010, and includes 130 peopleworking in the Banks NAMA unit and 70 associated supportstaff.

Other administrative costs have increased by 50% as a result ofsignificantly higher professional fees related to loan book assetquality and other ongoing reviews. Other cost lines continue toremain tightly controlled.

Exceptional costs of 29m were incurred in the period andprimarily relate to professional fees associated with the Banksrestructuring, the NAMA process and the ongoinginvestigations into legacy matters.

Future Strategy

The transfer of the INBS business into the Bank is nowcomplete and full integration into a single organisation isunderway. This transfer and integration is another importantstep towards the reshaping of the Irish banking landscape forfuture economic recovery. As has already been announced, theBank intends to change its name to Irish Bank ResolutionCorporation Limited or IBRC. It is anticipated that therenaming process will complete in the coming months.

I believe that the work completed by those in the Bank, inconjunction with the Authorities, over the last 18 months haspaved the way for an orderly and effective work out which isin the best interests of the Irish taxpayer. This reflects a majorshift in focus for the organisation from being a high octanelender to an effective asset manager of portfolio sales andredemptions. This focus will remain the Banks priority as weface into the challenges of the next phases of restructuring.

I join the Chairman in expressing a sincere thank you to ourmanagement team, our staff and other stakeholders for all thesupport and consistent effort in difficult and uncertain times.

A.M.R. (Mike) Aynsley

Group Chief Executive25 August 2011

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usiness review

This business review covers the six months to 30 June 2011and includes commentary on key areas of financial andoperating performance of the Group during that period.

The Bank reports a loss before taxation for the six months of101m. This loss arises primarily due to net impairment

charges of 778m, a loss of 214m on the transfer of themajority of the Banks Irish and UK deposit books, certainNAMA bonds and the Banks shares in its deposit-taking Isle ofMan subsidiary to Allied Irish Banks, p.l.c. (AIB) and its UKsubsidiary AIB Group (UK) p.l.c. (AIB UK) on24 February 2011 pursuant to a transfer order made by theIrish High Court under Section 34 of the Credit Institutions(Stabilisation) Act 2010 (CISA) (the AIB Transfer Order) and aloss of 40m on other disposals offset to an extent by anoperating profit of 332m and a favourable adjustment of601m to the cumulative loss on transfer to the National AssetManagement Agency (NAMA). Interest income on thepromissory note is a key contributor to operating profit in theperiod. For the comparable period to 30 June 2010 the Bankreported a loss before taxation of 8.2bn reflecting totalimpairment charges of 4.9bn and a loss on disposal of assetsto NAMA of 3.5bn.

On 29 June 2011 the European Commission (EC) approved,under EU state aid rules, the joint restructuring and work-outplan (the Restructuring Plan) for the Bank and IrishNationwide Building Society (INBS) which had been submittedby the Irish Government to the EC on 31 January 2011.Pursuant to the Restructuring Plan, the Bank and INBS were tobe combined and then resolved over a period of up to tenyears. While this business review covers the period to 30 June2011 only, the following post period end events should benoted: (a) on 1 July 2011, all of the assets and liabilities (withthe exception of certain limited excluded liabilities) of INBStransferred to the Bank by way of a further transfer ordermade, by the Irish High Court, under Section 34 of CISA (the

INBS Transfer Order) and (b) on that date the Bankannounced its intention to change its name to Irish BankResolution Corporation Limited (IBRC) over the comingmonths. The strategic objective of the Bank will be to work outits assets in an orderly process over a period of up to ten years,securing the best outcome for the taxpayer.

The results for the six months ended 30 June 2011 do notinclude any amounts relating to INBS. Further information in

relation to the INBS Transfer Order is contained in note 41,Events after the reporting period.

The transfer of the majority of the Banks customer depositspursuant to the AIB Transfer Order increased the Banksreliance on central bank and monetary authority support

mechanisms for funding. This represented 86% of totalfunding (40.8bn) at 30 June 2011 (31 December 2010: 70%,45.0bn), with 38.4bn borrowed under special fundingfacilities (31 December 2010: 28.1bn).

Total assets at 30 June 2011 amounted to 54.1bn, a declinein the period of 16.7bn or 24% on a constant currency basis.The principal items driving this reduction were the transfer ofNAMA senior bonds to AIB pursuant to the AIB Transfer Order,the ongoing deleveraging of the loan portfolio and receiptfrom the Minister for Finance, the Banks sole shareholder, ofthe first payment due on the promissory note. The Governmentpromissory note represents 44% of the Banks total assets asat 30 June 2011.

Gross customer lending at 30 June 2011 totals 32.8bn 1.Impaired loans amount to 16.9bn, with cumulativeimpairment provisions of 9.9bn representing 30% of totalloan balances.

Total capital support provided by the Minister for Finance, theBanks sole shareholder, remains at 29.3bn. The Total Capitalratio at 30 June 2011 is 13.7% with a Core Tier 1 ratio of12.1%.

Customer lending and asset quality

The Banks primary focus remains the orderly work out of theloan book while minimising losses to the taxpayer. Total grosscustomer loan balances declined in the period by 2.7bn or8% on a constant currency basis and amounted to 32.8bn 1 at30 June 2011.

Cumulative impairment provisions at 30 June 2011 amount to9.9bn with a specific lending impairment charge for the sixmonths to June 2011 of 0.9bn offset by a release of 0.2bnof the collective impairment provision. Impaired loans at30 June 2011 total 16.9bn representing 52% of overall loanbalances.

Total lending

Analysis of customer lending 1

Loans and advancesHeld for sale to customers

30 June 31 December 30 June 31 December2011 2010 2011 2010

bn bn bn bn

Ireland 0.9 0.9 15.4 16.2

UK 0.3 0.6 9.5 10.9

US 6.7 0.7 - 7.6

Total 7.9 2.2 24.9 34.7

Provisions for impairment (1.2) (0.6) (8.7) (9.5)

Customer lending net of impairment 6.7 1.6 16.2 25.2

Provisions as a % of loan balances 15% 27% 35% 27%

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Business review continued

Gross customer lending balances at 30 June 2011 total32.8bn 1, of which 24.9bn or 76% relate to loans andadvances to customers with 7.9bn or 24% classified as heldfor sale. Held for sale loan balances comprise the entire USloan portfolio of 6.7bn which is currently being activelymarketed and 1.2bn of loans which at 30 June 2011 were

expected to transfer to NAMA. Since the reporting period end,NAMA have confirmed that they will not now be acquiring0.9bn of these loans. The Banks Ireland division accounts for50% of total lending with the UK and US divisions accountingfor 30% and 20% respectively.

Lending balances have decreased on a constant currency basisby 2.7bn (8%) in the period as the Bank continues to focuson deleveraging its lending portfolio. The reduction in the loanbook has been primarily driven by disposals and repayments in

the US (1.1bn) and UK (1.0bn) where there have been signsof improvement and stabilisation in some sections of themarket, in addition to an improvement in the availability ofliquidity and refinancing options in those markets.Deleveraging of the Irish portfolio remains more challengingdue to the continuing stressed economic environment and lack

of liquidity, however there has been some progress primarily inthe business banking and personal sectors with overall loanbalance reductions of 0.6bn.

The Bank transferred 33.9bn of assets (gross of impairmentprovisions) to NAMA in 2010 and as a result interest incomeon customer lending (including held for sale assets) for the sixmonths to June 2011 reduced to 0.4bn, a decline of 51%compared to the six months to 30 June 2010 (0.9bn).

Lending asset quality

Grading analysis 1 30 June 2011 31 December 2010

Loans and Heldadvances to for

customers sale Total Totalbn bn bn % bn %

Good quality 3.9 2.2 6.1 19% 7.6 20%

Satisfactory quality 0.1 0.1 0.2 1% 1.0 3%

Lower quality but not past due or impaired 3.4 1.4 4.8 14% 4.8 13%

Total neither past due nor impaired 7.4 3.7 11.1 34% 13.4 36%

Past due but not impaired 3.9 0.9 4.8 14% 5.9 16%

Impaired loans 13.6 3.3 16.9 52% 17.6 48%

24.9 7.9 32.8 100% 36.9 100%

Provisions for impairment (8.7) (1.2) (9.9) (10.1)

Total 16.2 6.7 22.9 26.8

The asset quality of the Banks loan book across all sectors andlocations continues to be adversely affected by the continuingstressed economic and market conditions. There has beenimprovement in some sections of the UK and US markets,however, the continuing weakness of the Irish economy hasseen an increase in the proportion of the overall loan bookthat is either impaired, past due but not impaired or lowerquality and is therefore deemed at risk by management. At30 June 2011, 80% of loans are classified as at risk(31 December 2010: 77%).

Impaired loans at 30 June 2011 total 16.9bn(31 December 2010: 17.6bn), and represent 52% of the totalloan book versus 48% at 31 December 2010. Ireland continuesto be the worst performing region with 64% of the portfolioimpaired and specific provisions totalling 41% of gross loans.In the UK and US 35% and 46% respectively of the portfoliosare impaired.

The amount of loans classified as past due but not impaireddeclined to 4.8bn at 30 June 2011 from 5.9bn at31 December 2010. The decrease primarily reflects thedownward migration of loan balances to impaired status.Ireland accounts for 3.0bn (62%) of the total past due butnot impaired amount, the UK 1.4bn (29%) and the US 0.4bn(9%).

The level of loans past due and outstanding for more than 90days, which represents the highest risk element of past due,has decreased from 3.2bn at 31 December 2010 to 2.9bnbut as a proportion of the overall past due figure has increasedto 60% at 30 June 2011 (31 December 2010: 55%). A fullaged analysis is included within note 37 to the interim financialstatements.

Lower quality but not past due or impaired loans at30 June 2011 totalled 4.8bn or 14% of gross lending assets.

Although currently not past due or impaired, these representloans which management deem to have a higher risk ofdeterioration.

Lending assets deemed to be good quality by managementtotal 6.1bn at 30 June 2011, representing 19% of total grosslending assets.

The asset quality of the loan book is a reflection of thedistressed economic and market conditions in which many ofthe Banks borrowers are currently operating. The Bankcontinues to pro-actively work with distressed borrowers withthe aim of maximising recovery for the Bank and, whereappropriate, restructures such loans so as to strengthen andimprove asset quality.

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Divisional lending balances by sector 1

30 June 2011

BusinessCommercial Residential Banking Other Total

bn bn bn bn bn

Held for sale

Ireland 0.7 0.1 - 0.1 0.9

UK 0.3 - - - 0.3

US 5.4 1.2 - 0.1 6.7

6.4 1.3 - 0.2 7.9

Loans and advances to customers

Ireland 8.9 0.7 3.2 2.6 15.4

UK 8.8 0.6 0.1 - 9.5

17.7 1.3 3.3 2.6 24.9

Total 24.1 2.6 3.3 2.8 32.8

The entire US loan book was classified as held for sale at30 June 2011 as a result of the commencement of a saleprocess pursuant to directions received by the Bank, andrequirements issued in respect of the Bank, in each case underCISA and consistent with the Banks Restructuring Plan.

The Banks non-held for sale loan portfolio totals 24.9bn.Commercial lending represents 71% of this and consists ofinvestment and development property lending across allsectors. 14bn (79%) of commercial lending relates to theretail, office and leisure sectors. The business banking sectoraccounts for 3.3bn, or 13%, of the loan portfolio. The Bank islooking primarily to business earnings to service these debtobligations. Residential lending of 1.3bn comprises 0.5bnresidential development and 0.8bn of residential investment.Ireland represents 62% of loans and advances to customers,excluding loans held for sale, with UK lending comprising thebalance.

Loans and advances to customers by regulatory groupsize 1

The top 20 customer groups, excluding loans classified as heldfor sale as at 30 June 2011, represent 8.6bn or 35%(31 December 2010: 9.1bn or 26%) of the Group's total loansand advances to customers before provisions for impairment.Total specific impairment provisions on these customer groupsamount to 2.8bn. Of the top 20 customer groups, one groupaccounts for 11% of gross loans and advances to customers. Aregulatory customer group typically consists of a number ofconnected entities and the balances represent multipleindividual loans secured by diverse portfolios of assets andmultiple contracted cash flows.

At 30 June 2011 undrawn committed facilities totalled 0.5bn(31 December 2010: 0.6bn). Advances during the periodwere restricted to previously committed facilities or approvedto protect asset quality and aimed at reducing the overall riskto the Bank. In line with commitments given by the Bank inconnection with the approved Restructuring Plan, the Bank isnot engaged in any new lending to new customers.

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Lending impairment charge for the period

Income statement - lending impairment 6 months 6 months Yearended ended ended

30 June 30 June 31 December

2011 2010 2010m m m

Specific charge - loans and advances to customers 903 2,492 4,956

Specific charge - held for sale 36 2,280 2,683

Total specific lending impairment 939 4,772 7,639

Collective provision movement (209) 27 21

Total lending impairment 730 4,799 7,660

The specific lending impairment charge of 939m for the sixmonths to 30 June 2011 represents 5.4% of average loanbalances. The overall charge has reduced significantly

compared to the same period in 2010 due to the reduction ingross loan balances primarily as a result of the transfer ofassets to NAMA in 2010. Of the total charge 903m relates toloans and advances to customers with 36m relating to assetsclassified as held for sale. The entire US loan book wasreclassified as held for sale at 30 June 2011. The loans andadvances charge includes impairment related to US loans priorto their designation as held for sale.

Impairment is calculated in accordance with IFRS and reflectslosses incurred in the period based on conditions existing at30 June 2011. Losses expected as a result of future events, nomatter how likely, are not recognised under IFRS. In line withthe Banks credit risk management process, the specific chargewas determined following a detailed assessment by Group RiskManagement.

There has been a release of 209m in the collectiveimpairment provision in the period. The balance sheetcollective impairment provision at 30 June 2011 is 995m, or

6.3% of the total performing loan book. This release isprincipally attributable to the decrease in the performing loanbook, on which the Incurred But Not Reported provision isassessed, which continued to fall as a result of thedeleveraging of the portfolio and a migration of loans to non-performing. At 30 June 2011 the performing portfolio totalled15.9bn compared to 19.3bn at end December 2010 and29.8bn at 30 June 2010. The collective impairment provisionreflects an allowance for loan losses existing in the performingloan book where there is currently no specific evidence ofimpairment on individual loans. The provision has beencalculated based on historical loss experience supplemented byobservable market evidence and managements judgementrelating to market conditions at 30 June 2011.

Income statement - specific lending impairment 6 months 6 months Yearended ended ended

30 June 30 June 31 December2011 2010 2010

m m m

Ireland 773 3,755 5,813

UK 143 459 737

US 23 558 1,089

Total 939 4,772 7,639

Ireland continues to be the worst affected market accountingfor 82% of the overall specific impairment charge reflectingthe continuing difficult economic environment, lack of liquidityand weak consumer sentiment.

On a sector basis, 0.6bn (68%) of the specific charge relatesto investment property assets. This has primarily been driven byinvestment property valuations in Ireland which have yet tostabilise and have the potential to fall further. Developmentloan assets contributed 0.1bn (6%) of the total specificcharge with Ireland accounting for 76% of the charge ondevelopment loan assets. The development property market inIreland continues to remain severely dislocated with land

values declining back to agricultural values in many cases. Asignificant overhang continues to exist in both the commercialand residential markets.

The remaining specific charge of 0.2bn (26%) is attributableto business banking (0.1bn) and personal lending (0.1bn), ofwhich 99% relates to Ireland. The business banking portfoliocontinued to experience extremely tough trading conditionsduring the period with a significant number of liquidations andreceiverships in Ireland. The personal lending charge primarilyrelates to smaller personal loans.

As advised in the 2010 Annual Report and Accounts, the Bankis undertaking an internal review of historical interest ratesettings as applied to certain customer loan accounts for theperiod prior to January 2005, to determine whether interestrates applied were consistent with terms of the associated

customer loan documentation. An additional provision of22m was charged in the period to cover the amount of anyliability to customers who may have been adversely affected,taking the total charge to 67m.

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NAMA

In the current period the Bank has recognised a net reductionof 601m in the overall reported loss on disposal of assets toNAMA. This primarily results from positive valuationadjustments, both settled and expected, relating to the

completion of due diligence on a portion of the loanstransferred to NAMA during November and December 2010.

In late 2010 the Bank transferred 17.5bn of loans to NAMAwithout full due diligence having been completed. The loanswere transferred at an average discount of 64%. During theperiod to 30 June 2011 the Bank received nominalconsideration of 284m, 95% in the form of NAMA seniorfloating rate notes and 5% in the form of NAMA subordinatednotes. This represents the net amount owing to the Bankfollowing the completion of due diligence on 5.5bn of loans,the settlement of certain valuation adjustments and repaymentto NAMA of consideration previously received in respect of asmall number of ineligible loan assets that were transferredback to the Bank. The NAMA bonds received were recognisedat an initial fair value of 96% and 30% respectively.

The final overall loss on disposal of assets to NAMA will onlybe determined when full due dil igence has been completed byNAMA on all assets transferred. However, on the basis of workcompleted to date in connection with loan collateralvaluations, and based on preliminary engagement with NAMA,the Bank has also recognised an asset of 262m at30 June 2011. This asset, which involves estimations andassumptions, represents the anticipated value of further netpositive valuation adjustments yet to be received.

NAMA has complete discretion as to which assets will beacquired. The remaining assets which the Bank expects totransfer to NAMA have been categorised in the consolidatedstatement of financial position as held for sale assets. At

30 June 2011 the Bank had 1.2bn of loans classified asremaining to transfer to NAMA. Since the period end, NAMAhave confirmed that they will not now be acquiring 0.9bn ofthese loans.

Funding

The Banks funding profile is primarily reliant on deposits fromcentral banks and monetary authorities. As at 30 June 2011deposits from central banks and monetary authorities totalled40.8bn representing 86% of total funding(31 December 2010: 45.0bn, 70% respectively).

Due to the short term and concentrated nature of its funding

base the Bank is not in full compliance with a number ofregulatory requirements.

The Banks credit ratings were downgraded to sub-investmentgrade in late 2010 by Standard & Poors and Moodys, and byFitch in February 2011.

The Group became a participant institution in the CreditInstitutions (Eligible Liabilities Guarantee) Scheme 2009 (theELG Scheme) on 28 January 2010 and certain qualifyingdeposits and securities issued by the Group from this dateonwards are covered by the ELG Scheme. The IrishGovernment has extended the ELG Scheme for certain eligibleliabilities to 31 December 2011.

Customer funding

Customer funding decreased by 10.4bn to 0.7bn in theperiod, primarily as a result of the transfer of 8.3bn ofcustomer deposits to AIB and AIB UK under the AIB TransferOrder. Remaining deposits are primarily related to lending

facilities.

Market and central bank funding

Borrowings from the Central Bank of Ireland under specialfunding facilities increased to 38.4bn (31 December 2010:28.1bn). The facilities utilised were a Special MasterRepurchase Agreement (SMRA), a Master Loan RepurchaseAgreement (MLRA) and a Facility Deed from the Central Bankof Ireland. The majority of the funds were advanced under theSMRA, involving the sale and repurchase of the promissorynote. Collateral assigned under the MLRA is derived from theBank's customer lending assets. The interest rate on thesefacilities is set by the Central Bank of Ireland and advised ateach rollover and is currently linked to the ECB marginallending facility rate.

Borrowings under open market operations decreased to2.4bn (31 December 2010: 16.9bn). This decline is mainlydue to the transfer of NAMA senior bonds to AIB pursuant tothe AIB Transfer Order which were eligible collateral for openmarket operations funding.

The total amount of loan assets assigned as collateral underrated securitisation programmes and secured central bankborrowings at 30 June 2011 was 5.9bn (31 December 2010:13.5bn). This fall is mainly due to certain programmes nolonger qualifying as eligible collateral under open marketoperations.

Debt securities in issue

Debt securities in issue decreased by 1.2bn to 5.7bn due tothe maturity of medium term notes. The Bank has no shortterm paper in issue.

Currency funding

Borrowings from central banks and a large proportion of theGroups other funding balances are denominated in euro whilea significant proportion of the Groups lending assets aredenominated in sterling and US dollars. As a consequence theGroup has made extensive use of foreign currency derivativeswith market counterparties and the National TreasuryManagement Agency (NTMA) to manage the currency profileof its balance sheet. The Bank has a contingency euro-sterlingswap agreement in place with the Central Bank of Ireland, at amarket based fee, which is available to assist the Bank inmanaging currency mismatches that may arise.

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Loans and advances to banks

Placements with banks decreased by 1.5bn during the period.The total balance of 2.0bn at 30 June 2011 includes 1.6bnof cash collateral placed with interbank counterparties tooffset changes in mark to market valuations arising from

derivative contracts and 0.4bn of primarily short termplacements with banks.

Available-for-sale assets

The Bank holds a portfolio of securities that are classified asavailable-for-sale (AFS). This portfolio comprises sovereignbonds, debt issued by financial institutions and subordinatedNAMA bonds.

AFS assets total 1.5bn at 30 June 2011, a decrease of 0.7bnfrom 31 December 2010. During the period 0.3bn of AFSsecurities matured and the Bank disposed of a further 0.4bnwith a loss on disposal of 1m reported in other operatingexpense.

The following table presents the external ratings profile of AFSassets.

30 June 31 December2011 2010

m m

AAA / AA 212 537

A 289 683

BBB+ / BBB / BBB- 726 827

Sub investment grade 79 -

Unrated 204 172

Total 1,510 2,219

Senior bank bonds account for 65% of holdings, eurodenominated sovereign 21% and other bonds 14%. Of thetotal bank bonds included within the portfolio 0.4bn, or 26%,relate to bonds issued by Irish banks covered under the IrishGovernment guarantee scheme. The movement in sub-investment grade holdings is due to rating downgrades in theperiod on bonds held at 31 December 2010.

All bonds are reviewed for impairment on an individual basis,with impairment charges reflected in the income statement.There has been no impairment of AFS securities during theperiod. The closing market value of the AFS portfolio at

30 June 2011 is 1.5bn.

Promissory note

The Minister for Finance, as the Banks sole shareholder, hasprovided the Bank with a promissory note to the value of25.3bn comprising four tranches. The promissory note pays10% of the initial principal amount of each tranche annually.On 31 March 2011, the Bank received the first instalment of2.53bn resulting in the promissory note having a revisedprincipal amount of 23.6bn from 31 March 2011.

The promissory note has resulted in the Group havingsignificant interest rate risk as it is a fixed rate instrument. TheBank has hedged a total of 4.3bn of the nominal amountusing amortising interest rate swaps. A further 5.7bn ofeconomic hedges exist in the form of the Groups capital andfixed rate debt issuance. However significant fixed interest rate

exposure remains with limited capacity to hedge furtheramounts with market counterparties.

The promissory note is currently pledged as collateral forfunding under the SMRA with the Central Bank of Ireland.

Capital

The regulatory capital resources of the Group include 29.3bnof capital contributed by the Irish Government. Thesecontributions restored the levels of Core Tier 1 regulatorycapital following losses incurred by the Bank during the pasttwo years. As at 30 June 2011 the Groups Tier 1 Capital ratiois 12.1% with a Total Capital ratio of 13.7%. The level of

surplus regulatory capital above the minimum required 8%Total Capital ratio at 30 June 2011 is 1.8bn.

Regulatory capital ratios have increased since31 December 2010 due to a reduction in risk weighted assetsduring the six month period of 5.3bn or 14%. This reductionis primarily related to a reduction in lending assets driven bydisposals and repayments, particularly in the UK and USmarkets. Specific impairment charges incurred in the periodalso reduced the level of risk weighted assets.

Due primarily to the promissory note issued by the Minister forFinance, the Bank has 26bn of exposure to the IrishGovernment at 30 June 2011. The level of this exposure hasreduced since 31 December 2010 mainly due to the transfer ofNAMA senior bonds to AIB in February 2011, and payment ofthe first instalment of the promissory note. Irish Governmentexposure is risk weighted at 0% in line with the requirementsof the Capital Requirements Directive and guidance from theCentral Bank of Ireland. The Group adopts the Basel IIStandardised Approach in calculating its minimum capitalrequirements.

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Restructuring

Pursuant to a direction order made by the Irish High Courtunder Section 9 of CISA on 8 February 2011 the Bank wasdirected to (a) reduce its net lending in line with forecastsderived from the Restructuring Plan, (b) formulate a detailedsteps plan for the rationalisation and, where appropriate,closure of the Banks UK offices and its branches in Dusseldorf,Vienna and Jersey and submit it to the NTMA by31 March 2011, (c) formulate a detailed steps plan for thedisposal of the Banks Wealth Management business andsubmit it to the NTMA by 31 March 2011, (d) formulate inconjunction with INBS a detailed steps plan for the Banksacquisition of/merger with INBS and submit it to the NTMA by31 March 2011 and (e) transfer the remaining eligible loanassets (as defined in the National Asset Management AgencyAct 2009) to NAMA by the later of 31 December 2011 or thecompletion of any ongoing litigation delaying transfer of thoseloans. On 31 March 2011, the Bank submitted the three stepsplans referred to at (b), (c) and (d) above to the NTMA.

On 7 April 2011 the Minister for Finance issued certainrequirements to the Bank under Section 50 of CISA pursuant towhich the Bank was obliged to implement in all materialrespects, with the approval of the NTMA, the high level stepsplans appended thereto in relation to (i) the rationalisationand, where appropriate, closure of the Banks UK offices and

its branches in Dusseldorf, Vienna and Jersey, (ii) the disposalof the Banks Wealth Management business and (iii) the Banksacquisition of/merger with INBS. The Bank was also required toprepare, in conjunction with INBS and the NTMA, a high levelrestructuring and work out steps plan, based on theRestructuring Plan (the High Level Steps Plan) and, subject to

the approval of the NTMA, implement that High Level StepsPlan, subject to any variations directed by the EC. The Bank isproceeding to implement the High Level Steps Plan, followingits approval by the NTMA on 20 June 2011.

The Banks branches in Vienna and Jersey closed in June 2011.As set out in note 41, Events after the reporting period, theassets and liabilities of INBS (subject to certain limited excludedliabilities) transferred to the Bank by way the INBS TransferOrder. Further, the Banks branch in Dusseldorf is scheduled toformally close shortly (all customer deposits have been repaid).

The Group is examining the potential sale of its WealthManagement business and has received non-binding indicativeproposals from various potential acquirers. A number of theseprospective purchasers have been invited to further progresstheir assessment of the business and a subsequent phase ofdue diligence has since commenced. No final decision howeverhas yet been taken by the Board to dispose of the business andevaluation of the alternative proposals is ongoing.

Costs

Operating expenses 6 months 6 months Yearended ended ended


m m m

Staff costs 56 67 130

Other administrative expenses 60 40 108

Depreciation and amortisation 12 12 26

Recurring operating expenses 128 119 264

Exceptional costs 29 14 89

Total operating expenses 157 133 353

Total recurring operating expenses for the six months to30 June 2011 are 128m and exceptional costs are 29m.

Staff costs have fallen by 16% in the six months to30 June 2011 compared with the comparative period reflectinga 17% reduction in average employees primarily due to 210staff transferring to AIB and AIB UK as a result of the AIBTransfer Order. The Group headcount at 30 June 2011 is1,075, a reduction of 221 since 31 December 2010, andincludes 130 people working in the Banks NAMA unit.

Other administrative costs have increased due to significantlyhigher professional fees related to loan book asset quality

versus the comparative period to June 2010 and other ongoingreviews. Other cost lines continue to remain tightly controlled.Exceptional costs of 29m were incurred in the period andprimarily relate to professional fees associated with the Banksrestructuring, the NAMA process and ongoing reviews intolegacy matters.

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Taxation

No Irish tax will be payable on the Groups Irish businessactivities due to the availability of losses in the Bank, takinginto account projected full year results to December 2011,which are offset against profits within the Group. However acurrent period foreign tax charge of 6m arises.

A deferred tax credit of 2m has been recognised to the extentthat it is probable that any potential additional chargeableprofits can be offset by current period losses.

Risks and uncertainties

The Group is subject to a variety of risks and uncertainties inthe course of its business activities. The principal risks anduncertainties facing the Bank at present are those related togeneral economic conditions, Government policy andrestructuring risk, ratings downgrades, liquidity and fundingrisk, the NAMA process, credit risk, operational risk, events of

default risk, regulatory compliance risk, market risk, valuationrisk, the Fitness and Probity regime, and litigation and legalcompliance risk. In addition continued concerns within thebanking industry regarding counterparty and country risk couldadversely impact on the Bank. More detail is contained in thePrincipal risks and uncertainties statement on pages 16 to 20.

Subsequent events and futuredevelopments

The key events that have occurred since the end of the periodare reviewed in note 41 to the interim financial statements,which includes further detail on the INBS Transfer Order. TheGroup Chief Executives review and the Chairmans statementreview the outlook and future of the Group.

1 Gross of impairment provisions and including lendingassociated with the Groups assurance company

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Principal risks and uncertainties

The Group is subject to a variety of risks and uncertainties,including in the normal course of its business activities. TheTransparency (Directive 2004/109/EC) Regulations 2007 requirea description of the principal risks and uncertainties facing theGroup for the remaining six months of the financial year.

The Board of Directors and senior management have ultimateresponsibility for the governance of all risk taking activity andhave established a framework to manage risk throughout theGroup. Details of the risk management policies and processesthat the Group adopts are contained in note 51 to the 2010Annual Report and Accounts.

The business risks and uncertainties below are those riskswhich the Directors currently believe to be the material andprincipal risks to the Group for the remaining six months of thefinancial year. The precise nature of all the risks anduncertainties that the Group faces cannot be predicted andmany of these risks are outside of the Groups control. Theprincipal risks and uncertainties outlined below should be readin conjunction with the Chairmans statement and the GroupChief Executives review.

General economic conditions

The Groups results are influenced by general economic andother business conditions in the Groups three key markets:Ireland, the UK and the US.

Notwithstanding a tentative return to export-led growth inIreland, economic conditions in Ireland remain challenging andconsequently the results of the Group have been adverselyaffected. Ireland continues to experience high unemployment,subdued consumer confidence and a continued decline indomestic commercial activity. Also, although Ireland iscurrently adhering to the conditions of the EU/IMF Programmeof Financial Support for Ireland, recent months have seen anescalation of the sovereign debt crisis at a European level,which poses risks to overall economic stability and economicrecovery both in Ireland and in Europe in general. In addition,austerity measures introduced in the December 2010 budgetcontinue to define domestic business sentiment.

Continued deterioration in property prices could furtheradversely affect the Groups financial condition and results ofits operations. The Groups financial performance may also beaffected by future recovery rates on assets and the historicalassumptions underlying asset recovery may no longer beaccurate given the general economic situation.

While the UK and US have returned to modest growth,

conditions remain uncertain surrounding the sustainability ofboth the global and relevant regional economic recoveries,particularly if fiscal and monetary supports are withdrawn. Inthe UK, there is the risk that a slow down in the demand forgoods and services due to UK Government spending cutbacksand higher taxes could have a negative effect on the countrysmodest economic recovery. As a result, unemployment couldincrease, and residential and commercial property would suffera second period of falling prices.

Government policy and restructuring risk

As the Banks only shareholder, and under legislative powersrelevant to the Bank, the Minister for Finance is in a position toexert significant influence over the Group. The Bank is alsowholly reliant on the support of the Irish Government.Government policy in respect of both the Bank and the widerfinancial services sector has a major impact on the Group.Changes to government policies or the amendment of existingpolicies could adversely impact the financial condition andprospects of the Group.

For instance, if new governmental policies were to require theBank to resolve its position over a shorter than expected timeframe, projected asset recovery values could be negativelyimpacted.

The speed of deterioration in the Irish economy and thebanking sector in the second half of 2010 culminated with theGovernment, International Monetary Fund (IMF) and theEuropean Union (EU) agreeing a substantial assistance

package for the country which included agreements toreorganise and restructure the Irish banking sector, includingthe Bank. In that respect, the IMF and the EU retain significantinfluence on the future of the Bank.

The Credit Institutions (Stabilisation) Act 2010 (CISA), whichwas enacted on 21 December 2010 following agreement ofthe assistance package, gives broad powers to the Minister forFinance, in particular, in relation to: (i) transferring relevantinstitutions assets and liabilities to facilitate the restructuringof the banking sector; and (ii) achieving appropriate burdensharing by subordinated creditors in relevant institutions thathave received State support, on a case by case basis and underparticular conditions. The legislation provides the legislativebasis for the reorganisation and restructuring of the banking

system agreed in the joint EU/IMF Programme and is the firstimportant step in putting in place an extensive SpecialResolution Regime (SRR) that will provide for a comprehensive

framework to facilitate the orderly management andresolution of distressed credit institutions. (Source:Department of Finance)

In this context, the Irish Government submitted a jointrestructuring plan and work-out plan in respect of the Bankand Irish Nationwide Building Society (INBS) to the EuropeanCommission (EC) on 31 January 2011 (Restructuring Plan).The Restructuring Plan had been prepared in conjunction withthe Department of Finance and the National TreasuryManagement Agency (NTMA).

A direction order (the Direction Order) was made by the Irish

High Court under Section 9 of CISA on 8 February 2011 underwhich the Bank was directed to (a) reduce its net lending inline with forecasts derived from the Restructuring Plan, (b)formulate a detailed steps plan for the rationalisation and,where appropriate, closure of the Banks UK offices and itsbranches in Dusseldorf, Vienna and Jersey and submit it to theNTMA by 31 March 2011, (c) formulate a detailed steps planfor the disposal of the Banks Wealth Management businessand submit it to the NTMA by 31 March 2011, (d) formulate inconjunction with INBS a detailed steps plan for the Banksacquisition of/merger with INBS and submit it to the NTMA by31 March 2011, (e) transfer the remaining eligible loan assets(as defined in the National Asset Management Agency Act2009 (the NAMA Act)) to the National Asset ManagementAgency (NAMA) by the later of 31 December 2011 or thecompletion of any ongoing litigation delaying transfer of thoseloans and (f) take certain steps in connection with an auctionprocess to be operated by the NTMA in connection with thetransfer of certain of the Banks deposits and assets.

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Principal risks and uncertainties continued

On 24 February 2011, the Irish High Court made a transferorder under Section 34 of CISA pursuant to which the majorityof the Banks Irish and UK deposit books, certain NAMA bondsand the Banks shares in its wholly-owned deposit-taking Isleof Man subsidiary, Anglo Irish Bank Corporation (International)PLC were transferred to Allied Irish Banks, p.l.c. (AIB) and AIB

Group (UK) p.l.c. (AIB UK) (the AIB Transfer Order). On31 March 2011, the Bank submitted the three steps plansreferred to at (b), (c) and (d) above to the NTMA. On7 April 2011 the Minister for Finance issued certainrequirements (Ministerial Requirements) to the Bank underSection 50 of CISA pursuant to which the Bank was obliged toimplement in all material respects, with the approval of theNTMA, the high level steps plans appended thereto in relationto (i) the rationalisation and, where appropriate, closure of theBanks UK offices and its branches in Dusseldorf, Vienna andJersey, (ii) the disposal of the Banks Wealth Managementbusiness and (iii) the Banks acquisition of/merger with INBS.The Bank was also required to prepare, in conjunction withINBS and the NTMA, a high level restructuring and work outsteps plan, based on the Restructuring Plan (the High LevelSteps Plan) and, subject to the approval of the NTMA,implement that High Level Steps Plan, subject to any variationsdirected by the EC. The Bank is proceeding to implement theHigh Level Steps Plan, following approval by the NTMA on20 June 2011.

The Restructuring Plan, which was approved by the EC on29 June 2011, provides for the amalgamation of the Bank withINBS and sets out in detail how the loan books of thecombined entity will be resolved over a period of up to tenyears. To ensure that the assets are managed in a wayconsistent with the resolution of the combined entity, certaincommitments are now binding upon the Bank, including acommitment that it cannot enter into new activities.

The Bank has prepared an operating plan which is intended to

form the basis for the implementation of the RestructuringPlan and the High Level Steps Plan. The operating plan focuseson accelerated deleveraging of the Bank, and includes theaccelerated disposal of its US loan portfolio and the disposal orwind-down of its Wealth Management division in accordancewith the Restructuring Plan, the Direction Order, the MinisterialRequirements and the High Level Steps Plan. The suggestedinitiatives will be subject to operational challenges and marketdependencies in respect of timing and optimal pricing, whichwill increase the execution risk of the operating plan.

Note 41, Events after the reporting period, confirms that, since30 June 2011, the assets and liabilities (subject to certainlimited excluded liabilities) of INBS transferred to the Bank byway of a High Court transfer order under Section 34 of CISAon 1 July 2011 (the INBS Transfer Order). The operationalrisks associated with the implementation of the transfer couldhave an adverse impact on the financial condition andoperations of the combined Group, while the pendingfinalisation of transfer value attaches financial risks to theintegration of the Bank and INBS which have yet to be verified.

Ratings downgrades Bank and Sovereign

During the first six months of 2011, the Banks long-termStandard & Poors (S&P) counterparty credit rating wasdowngraded by three notches to CCC and remains belowinvestment grade. Similar action was taken by Moodys duringthe period (rating cut from Ba3 to Caa2) and by Fitch (ratingcut from BBB- to BB-). In taking these rating actions, creditrating agencies cited concerns about the Irish Governmentspublically indicated preference to impose losses on the Group'ssenior unsecured and unguaranteed debt holders.

Also during the period the Irish Sovereigns senior debtsuffered further credit rating downgrades. S&P lowered theirrating from A to BBB+, Moodys adjusted their rating fromBaa1 to Baa3, and Fitch reduced their rating from BBB+(Stable) to BBB+ (Negative).

Liquidity and funding risk

Liquidity and funding risk is the risk that the Group does nothave sufficient financial resources available at all times to meetits contractual and contingent cash flow obligations or canonly secure these resources at excessive cost. This risk isinherent in all banking operations and can be affected by arange of institution-specific and market-wide events. TheGroups liquidity may be adversely affected by a number offactors, including significant unforeseen changes in interestrates, ratings downgrades, higher than anticipated losses onloans and disruptions in the financial markets generally.

In response to major market instability and illiquidity,governments and central banks around the world haveintervened in order to inject liquidity and capital into financialmarkets, and, in some cases, to prevent the failure of

systemically important financial institutions. These variousinitiatives to stabilise financial markets are subject torevocation or change, which could have an adverse effect onthe availability of funding to the Group.

In common with many other banks, the Groups access totraditional sources of liquidity remains constrained. The Bankhas experienced greater reliance on Government and monetaryauthority support mechanisms due to significant customerdeposit outflows and the maturity of debt securities. TheBanks continued reliance on support from central banksincludes access to special funding facilities, a key factor inensuring successful implementation of the operating plan aswell as adapting to potential regulatory developments. Thefunding support from central banks and monetary authoritiesamounted to 40.8bn at 30 June 2011, representing 86% oftotal funding, and included 38.4bn borrowed under specialliquidity facilities. This support increased from December 2010(70% of total funding) following the transfer of certain Irishand UK deposits and NAMA bonds to AIB and AIB UK underthe AIB Transfer Order.

Should monetary authorities materially change their eligibilitycriteria or limit the Banks access to such special fundingfacilities without providing an alternative funding source, thiswould adversely affect the Groups financial condition andprospects. Additionally, credit rating downgrades may impacton the eligibility of assets currently pledged as collateral forcentral bank open market sale and repurchase agreements.

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NAMA

The Bank continues to be designated as a participatinginstitution in NAMA. The NAMA Act provides for theacquisition by NAMA from participating institutions of eligiblebank assets, which may include performing and non-performing loans made for the purpose, in whole or in part, ofpurchasing, exploiting or developing development land andloans associated with these loans.

As NAMA reserves the right to adjust the consideration paidfor assets previously transferred when the due diligence iscompleted, the final adjustment to transfer values will only bedetermined when full due diligence in respect of the assets hasbeen completed. These adjustments have the potential to beeither positive or negative, depending on the assessment ofthe underlying loans.

At 30 June 2011 the Bank had 1.2bn of loans remaining totransfer to NAMA. This amount has subsequently beenreduced by 0.9bn due to a decision by NAMA that it will not

be acquiring certain loans previously listed as NAMA eligibleassets (see note 41). Not all of the remaining assets mayultimately transfer to NAMA.

The Group may be required to indemnify NAMA in respect ofvarious matters, including NAMAs potential liability arisingfrom any error, omission, or misstatement on the part of theGroup in information provided to NAMA. In addition, the ECmay assess the compatibility and price of the transferred assetsand could invoke a claw-back mechanism in the case of excesspayments.

The NAMA Act provides that up to five per cent of the debtsecurities that will be issued to a participating institution maybe subordinated. If NAMA ultimately makes a loss, the Groupmay not recover the full value of those subordinated bonds.

Notwithstanding these uncertainties, the transfer of assets toNAMA is a fundamental part of the Banks restructuringprocess and has served as the primary mechanism fordeleveraging the balance sheet, reducing credit risk exposureand providing additional liquidity.

Credit risk

Credit risk is the risk that the Group will suffer a financial lossfrom a counterpartys failure to pay interest, repay capital ormeet a commitment, and the collateral pledged as security isinsufficient to cover the payments due. It arises primarily fromthe Groups lending activities to customers, interbank lendingand repurchase agreements, investment in available-for-saledebt securities and derivative transactions.

Adverse changes in the credit quality of the Groupsborrowers, counterparties and their guarantors, and adversechanges arising from the general deterioration in globaleconomic conditions, have reduced the recoverability of theGroups loan assets and have continued to increase thequantum of impaired loans and impairment charges during theperiod.

The Group has exposures to a range of customers in differentgeographies, including exposures to investors in, anddevelopers of, commercial and residential property. Irishproperty prices continued to show significant declines

throughout the last year and developers of commercial andresidential property are facing particularly challenging marketconditions, including substantially lower prices and volumes. Inaddition, the Groups exposure to credit risk is exacerbatedwhen the collateral it holds cannot be realised or is liquidated

at prices that are not sufficient to recover the full amount ofthe loan, which is most likely to occur during periods ofilliquidity and depressed asset valuations, such as thosecurrently being experienced.

As a result of the integration of the INBS business into the

Group pursuant to the Restructuring Plan, the Direction Order,the Ministerial Requirements and the High Level Steps Plan, theBank will have exposure to residential mortgages, which havea higher reliance on sustained employment levels to ensurecontinued servicing of existing debt. Note 41 confirms that,since the end of the reporting period, the assets and liabilities(subject to certain limited excluded liabilities) of INBStransferred to the Bank by way of the INBS Transfer Order.

The Irish property market remains severely impacted by a lackof confidence and liquidity which has led to further reductionsin property collateral values. This, together with an extremelydifficult operating environment in the Groups key markets,particularly in Ireland, and the erosion of clients net worth hasresulted in a substantial deterioration in the asset quality of theBanks loan book.

The Groups financial performance will be affected by futurerecovery rates on loan assets. Any further deterioration inproperty prices, any failure of prices to recover to their longterm averages or any delay in realising collateral secured onthese loan assets will further adversely affect the Groupsfinancial condition and results of operations.

Following the approval of the Restructuring Plan by the EC, theGroup is also exposed to additional recovery risk given thatcounterparties are aware that the plan provides for an orderlywork out of its loan book over a period of years as well asbeing dependent on efficient execution of debt restructuringswhere required. As a result, amounts recoverable may bereduced.

Operational risk

Operational risk is the risk of loss arising from inadequatecontrols and procedures, unauthorised activities, outsourcing,human error, systems failure and business continuity.Operational risk is inherent in every business organisation andcovers a wide spectrum of issues. The Groups management ofits exposure to operational risk is governed by a policyprepared by Group Risk Management and approved by theRisk and Compliance Committee.

The Groups exposure to operational risk is elevated due to thetransitional support arrangements in place following the

making of the AIB Transfer Order, which resulted in theimmediate transfer of the majority of the Banks Irish and UKdeposit books and certain NAMA bonds to AIB and AIB UK.

Furthermore, given the ECs approval of the Restructuring Planby the EC on 29 June 2011, which envisaged the transfer ofthe INBS business into the Bank and orderly work out of thecombined entitys loan book over ten years, there is the addedrisk of a weakened control environment while the Groupimplements the operational plan to give effect to the approvedRestructuring Plan and High level Steps Plan. The lack of careerprospects and incentives in the medium term may lead to lossof staff and disillusionment among remaining staff, with anincreased associated risk of material error. Separately, thecurrent economic climate increases the risk of the occurrenceof fraud.

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Events of default risk

The Group's debt securities programmes and subordinatedcapital instruments contain contractual covenants and termsfor events of default which, if breached or triggered, couldresult in an actual or potential default that might result in thedebt concerned becoming payable immediately, or otheradverse consequences occurring.

CISA includes important provisions that are designed toprevent rights in respect of a potential event of default, or anevent of default becoming exercisable because of the makingorders or issuing of certain requirements under CISA oranything done on foot of such an order or requirements,including implementation of the High Level Steps Plan. CISAprovides that orders or requirements made under CISA maytake effect as a reorganisation measure under the CreditInstitutions Reorganisation and Winding Up Directive(CIWUD) and any law giving effect to it. The relevantprotective provisions of CISA apply in relation to the DirectionOrder, the AIB Transfer Order, the Ministerial Requirements

and the INBS Transfer Order. Each such order and requirementwas declared to be a reorganisation measure for the purposesof CIWUD. Accordingly, CISA and laws giving effect to CIWUDconfer important protections to the Bank with respect to thelaws of EU member states against certain default risks inrespect of the matters and timelines contained in the relevantorders and requirements.

With regard to litigation in the US in connection with allegedbreaches of covenant in the documentation governing certainsubordinated loan notes governed by New York Law, see thedisclosure concerning legal claims referred to in note 35 to theinterim financial statements.

Regulatory compliance riskRegulatory compliance risk primarily arises from a failure orinability to comply fully with the laws, regulations, standards orcodes applicable specifically to regulated entities in thefinancial services industry. The Bank is not in full compliancewith all Irish regulatory requirements. While the Bank ensuresthat the relevant Authorities are kept fully informed in thisregard, non-compliance may result in the Group being subjectto regulatory sanctions, material financial loss and/or loss ofreputation.

Regulatory risk also includes tax compliance risk, which is therisk associated with changes in tax law or in the interpretationof tax law. It also includes the risk of changes in tax rates andthe risk of failure to comply with procedures required by taxauthorities. Failure to manage tax risk effectively could lead toadditional tax charges. It could also lead to financial penaltiesfor failure to comply with required tax procedures or otheraspects of tax law. The Group is subject to the application andinterpretation of tax laws in all countries in which it operates.In relation to any tax risk, if the costs associated with theresolution of the matter are greater than anticipated, it couldnegatively impact the financial position of the Group.

Capital risk is the risk that the Group has insufficient capitalresources to meet its minimum regulatory capital requirements.Losses incurred by the Bank during the past two years haveplaced significant stress on the Bank's regulatory capitalresources and resulted in the Minister for Finance, as theBanks sole shareholder, providing 29.3bn of capital. The

Groups Total Capital ratio at 30 June 2011 is 13.7% whichrepresents 1.8bn of surplus capital above the 8% minimumrequirement. Further losses as well as any increased capitalrequirements could again lead to regulatory capital concerns inthe future.

Changes in government policy, legislation or regulatoryinterpretation applying to the financial services industry mayadversely affect the Groups capital requirements and,consequently, reported results and financing requirements.These changes include possible amendments to governmentand regulatory policies and solvency and capital requirements.

Market risk

Market risk is the risk of a potential adverse change in theGroups income or financial position arising from movementsin interest rates, exchange rates or other market prices.Changes in interest rates and spreads may affect the interestrate margin realised between income on lending assets andborrowing costs.

While the Group has implemented risk management methodsto mitigate and control these and other market risks to whichit is exposed, it is difficult to accurately predict changes ineconomic or market conditions and to anticipate the effects

that such changes could have on the Group.

Borrowings from central banks and a large proportion of theGroups other funding balances are denominated in euro whilesome of the Groups lending assets are denominated in sterlingand US dollars. As a consequence, the Group has madeextensive use of foreign currency derivatives to manage thecurrency profile of its balance sheet during the period.Continued access to market participants is required to enablethe Group to continue with this risk management strategy.

The promissory note, which is a fixed rate instrument, hasresulted in the Group having significant interest rate riskexposure. The Bank has hedged a total of 4.3bn of thenominal amount using interest rate swaps. A further 5.7bn ofeconomic hedges exist in the form of the Groups capital andfixed rate debt issuance. However, significant fixed rateexposure remains, with limited capacity to hedge furtheramounts with market counterparties.

In current market circumstances it is envisaged that the Bankwill have to continue to rely on support mechanisms providedby monetary and governmental authorities.

Valuation risk

To establish the fair value of financial instruments, the Grouprelies on quoted market prices or, where the market for afinancial instrument is not sufficiently active, internal valuationmodels that utilise observable market data. In certaincircumstances, observable market data for individual financialinstruments or classes of financial instruments may not beavailable. The absence of quoted prices in active marketsincreases reliance on valuation techniques and requires theGroup to make assumptions, judgements and estimates toestablish fair value. In common with other financialinstitutions, these internal valuation models are complex, andthe assumptions, judgements and estimates the Group isrequired to make often relate to matters that are inherentlyuncertain. These judgements and estimates are updated toreflect changing facts, trends and market conditions and anyresulting change in the fair values of the financial instrumentscould have an adverse effect on the Groups earnings andfinancial position.

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Fitness and probity regime

The Central Bank of Ireland recently announced forthcomingRegulations and Standards of Fitness and Probity, issued underPart 3 of the Central Bank Reform Act 2010 (2010 Act). The2010 Act provides for a fitness and probity regime for thereview of individuals performing controlled functions andpre-approval controlled functions, including directors andchief executive officers, in regulated financial service providersother than credit unions. Where the review causes the Head ofFinancial Regulation of the Central Bank of Ireland to form theopinion that there is reason to suspect the persons fitness andprobity to perform the relevant function, an investigation maybe conducted which may result in a prohibition notice beingissued preventing the person from carrying out the function.The Group could suffer reputational damage or adversefinancial performance if any issues were to arise under thefitness and probity regime.

Litigation and legal compliance risk

The Groups business is subject to the risk of litigation byinvestors, counterparties, customers, employees, pre-nationalisation shareholders or other third parties throughprivate actions, class actions, administrative proceedings,regulatory actions, criminal proceedings or other litigation. Theoutcome of any such litigation, proceedings or actions isdifficult to assess or quantify. The cost of defending futureproceedings or actions may be significant. As a result, suchlitigation, proceedings or actions may adversely affect theGroups business, financial condition, results, operations orreputation.

In the period since December 2008, various regulatory bodiesin Ireland have initiated investigations (including in some cases,criminal investigations) into certain aspects of the Banksbusiness, including certain loan and other transactionsinvolving former Directors and certain third parties. Theseinvestigations are ongoing and it is not possible at this stage togive any indication as to whether these investigations will

result in civil, administrative or criminal proceedings against theBank or any of its current or former Directors or officers.

Due to the complexity of the anticipated restructuring of theBank, there is a potential for unforeseen legal risks to arise.

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Statement of Directors responsibilities

The Directors are responsible for preparing the Interim Reportin accordance with International Accounting Standard 34 (IAS34), the Transparency (Directive 2004/109/EC) Regulations2007 and the Transparency Rules of the Irish Financial ServicesRegulatory Authority.

The Directors confirm that the condensed set of financialstatements has been prepared in accordance with IAS 34 andthat it gives a true and fair view of the assets, liabilities,financial position and loss of the Group and that, as requiredby the Transparency (Directive 2004/109/EC) Regulations 2007,the Interim Report includes a fair review of:

important events that have occurred during the sixmonths ended 30 June 2011;

the impact of those events on the condensedfinancial statements;

a description of the principal risks and uncertaintiesfor the remaining six months of the financial year;and

details of any related party transactions that havematerially affected the Groups financial position or

performance in the six months ended 30 June 2011.

Directors: Alan Dukes (Chairman)A.M.R. (Mike) Aynsley (Group Chief Executive)Gary Kennedy (Non-executive Director)

Secretary: Dr. Max Barrett

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Consolidated income statement (unaudited)For the 6 months ended 30 June 2011

6 months 6 months Yearended ended ended


Note m m m

Interest and similar income 1,189 1,098 2,304Interest expense and similar charges (717) (746) (1,562)Net interest income 2 472 352 742

Fee and commission income 3 33 23 47Fee and commission expense 3 (2) (41) (58)Net trading (expense)/income 4 (17) 1 (41)Financial assets designated at fair value 5 - (23) (23)Gain on liability management exercise 6 - - 1,589Other operating income/(expense) 7 3 (28) (104)

Other income/(expense) 17 (68) 1,410Total operating income 489 284 2,152

Administrative expenses 8 (145) (121) (327)Depreciation (7) (8) (16)Amortisation of intangible assets - software (5) (4) (10)Total operating expenses (157) (133) (353)

Operating profit before disposals and provisions 332 151 1,799Loss on transfer of assets and liabilities 10 (214) - -Loss on disposal of assets to NAMA 11 601 (3,468) (11,547)

Loss on disposal of other financial assets 12 (40) - -Provisions for impairment and other provisions 13 (778) (4,853) (7,767)

Operating loss (99) (8,170) (17,515)Share of results of joint ventures (2) (40) (104)

Loss before taxation (101) (8,210) (17,619)

Taxation 14 (4) - (32)Loss for the period (105) (8,210) (17,651)

Attributable to:Owner of the parent: (104) (8,210) (17,651)Non-controlling interests: (1) - -

(105) (8,210) (17,651)

The notes on pages 30 to 79 form an integral part of the condensed interim financial statements.

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Consolidated statement of comprehensive income (unaudited)For the 6 months ended 30 June 2011

6 months 6 months Yearended ended ended


Note m m m

Loss for the period (105) (8,210) (17,651)

Other compr

anglo interim report 2011

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